Watson Farley & Williams Asset
Finance Group
In a recent leading judgment, the issue of
whether a lessee under an aircraft operating lease could seek
“relief against forfeiture” was considered by the Commercial Court.
The case is reported as Celestial Aviation Trading 71 Limited vs
Paramount Airways Private Limited [2010] EWHC 185.
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Celestial leased three Embraer 175 aircraft to
Paramount for eight years on monthly rentals, with supplemental
rentals to build up a maintenance fund. The expected life of the
aircraft was 20 years. Paramount proved to be a very poor rent
payer and, although it paid rent, virtually never paid it on time,
constantly having to be chased for it.
Celestial’s patience was finally exhausted in
October last year when it terminated the leases and asked the
court, among other things, for an order that Paramount deliver the
aircraft back to Celestial. Paramount applied for “relief against
forfeiture” on the grounds that its only breach of the lease was to
fail to pay rent in the past. Presumably, it had brought the rent
up to date or was in a position to do so.
Relief against forfeiture has traditionally
been associated with leases of premises where the landlord is
entitled to recover the premises if the lessee fails to pay
rent.
However, the lease may have a significant
capital value to the tenant if the rent is below market value or it
has invested heavily in refurbishing the premises.
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By GlobalDataIn any event, a tenant is frequently entitled
to an order against the landlord to prevent the landlord recovering
the premises (relief against forfeiture) provided that the tenant
is ready, willing and able to pay any outstanding rent and has
behaved reasonably over the term of the lease.
In the case of hire purchase and finance
leases, lessees may have similar investment in leased equipment
when they are entitled to buy it for a nominal sum, or to the vast
majority of the proceeds of sale on sale of the equipment following
the expiry of a finance lease.
Over the years, the courts have extended
relief against forfeiture to cover these sort of cases. However,
this case is the first one to be heard which involved an operating
lease.
In the most recent case on a finance lease –
On Demand Information plc vs Michael Gerson (Finance) plc [2003] 1
AC 368 – the court suggested that it would only have jurisdiction
to grant relief where, essentially, the right to recover the
equipment on default is to secure payment of money.
This is obviously the case in the finance
lease where the sum payable on termination will normally be the
balance of the lessor’s investment and sale of the leased assets is
intended to enable the lessor to at least repay that
investment.
The court, however, did not agree that
Paramount was entitled to relief, taking the view that extending
the jurisdiction to grant relief from forfeiture to contracts
transferring a bare possessory right for only a proportion of the
economic life of the chattel would be a major extension of the
existing authority (although it may be argued that a lease of land
can be seen as a mere operating lease on occasions. It is certainly
expected that the land in question will have a life much longer
than that of the lease).
Having taken the view that it had no
jurisdiction to grant relief in this case, however, the court went
on to say that, in view of Paramount’s poor record in making timely
rental payments over the period of the lease to date, it would not
be inclined to grant relief even if it had jurisdiction to do
so.
